SEC Issues Proposed Rules on Rule 10b5-1 Plans and Insider Trading

Capital Markets

On December 15, 2021, the Securities and Exchange Commission (“SEC”) proposed amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”).  Comments to the proposal are due within 45 days after publication in the Federal Register.

Rule 10b5-1 is a safe harbor established to allow issuers and company insiders to trade shares during trading blackouts pursuant to a written plan adopted while not in possession of material non-public information as long as the plan complies with the provisions of Rule 10b5-1(c)(1).  These plans are often referred to as “Rule 10b5-1 trading plans” or “10b5-1 plans”.  Rule 10b5-1 trading plans have been a target of regulators recently due to concerns over insiders abusing the current rule.

The proposed amendment would add new conditions to the availability of the safe harbor, which include:

  • Requiring a “cooling-off” period: The requirement of new or modified 10b5-1 trading plans adopted by directors and officers to have a 120-day “cooling-off” period before trades could be executed.  New or modified issuer 10b5-1 stock repurchase plans would need to include a 30-day cooling-off period.
  • Overlapping 10b5-1 plans: The prohibition of having multiple or overlapping 10b5-1 plans for the same class of securities.
  • Limiting single-trade 10b5-1 plans: Occasionally, company insiders have adopted 10b5-1 plans that allow for a single trade. Use of the safe harbor for such single-trade 10b5-1 plans would be limited to only one such plan per 12-month period.
  • Written Certification: The requirement of directors or officers to provide written certification to the issuer prior to the adoption or modification of a 10b5-1 plan certifying: (i) they do not possess material non-public information about the issuer or security; and (ii) they are adopting the 10b5-1 plan in good faith.
  • Operating in Good Faith: The requirement that all 10b5-1 plans be operated in good faith.

The proposed rules would also address the lack of transparency under current rules by imposing new disclosure requirements regarding issuer insider trading policies, option grants and Rule 10b5-1 and other trading arrangements.  The proposed rules would require:

  • Annual Disclosure of ITPs: Issuers to disclose whether or not they have adopted insider trading policies (“ITPs”) and procedures annually in their annual report on Form 10-K (or forward incorporated into their Proxy Statement), and if they do not have such policies, explain why not.
  • Option Grants: Issuers to include in their compensation disclosures appearing in their annual report on Form 10-K (or forward incorporated into their Proxy Statement) (i) a description of the issuers option grant policies and practices; and (ii) a tabular disclosure providing certain information about option grants made 14 calendar days before or after the filing of a periodic report, or the filing or furnishing of a current report on Form 8-K that contains material non-public information.  This addition is in response to concerns related to “spring-loaded” option grants, which you can read more about in our client alert: “SEC Increases Scrutiny of ‘Spring-Loaded’ Compensation Awards”.
  • 10b5-1 plan adoption or termination disclosure: Quarterly disclosure regarding the adoption, modification or termination, and the material terms of, any Rule 10b5-1 plan or other trading arrangements by issuers, directors or officers. Such disclosures, along with the aforementioned annual ITP disclosures, would be subject to the certifications required by Section 302 of the Sarbanes-Oxley Act.
  • Insider Reporting under Section 16: Gift transactions to be reported on a Form 4 within two business days of such gift (currently permitted to be filed on Form 5 the following year).  Forms 4 and 5 will also include a mandatory check box indicating whether a transaction was made pursuant to a Rule 10b5-1 and the date of adoption of such plan.

Some of what the SEC’s amendments would impose on issuers and insiders are already followed in “best practices” surrounding implementation of current Rule 10b5-1 plans.  For instance, most insiders recognize a “cooling off” period prior to a 10b5-1 plan executing, although the rule’s proposed 120-day requirement is much longer than most would expect.  Currently, most counsel discourage insiders from adopting multiple or overlapping plans. Furthermore, most insiders already certify to brokers that they don’t possess material non-public information prior to entering into or modifying a 10b5-1 plan.  However, these rules, if approved, would give investors comfort in knowing these “best practices” are being followed by insiders, as well as improve transparency of insider participation in buying and selling issuer securities through increased disclosure.  

Notably, the proposed amendments do not address the fact that 10b5-1 plans can be canceled even when the company or insider has material nonpublic information. Previously, SEC Chair Gary Gensler has publicly expressed concern with this aspect of 10b5-1 plans.

Andrew Gibbons and Blake Leger are members of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.